Edition: July / September 2016 Edition
Editorials

COVER STORY

The lone Hunter

Stage set for pension-fund regulator’s saga. Complex trial beckons.
Depending on outcome, ramifications could be wider
than narrow employee-employer dispute.

Financial Services Board executive officer Dube Tshidi portrays FSB deputy executive officer for retirement funds Rosemary Hunter as being an “angry, distrustful and even vengeful woman”. Perhaps she is; perhaps she isn’t.



Sithole . . . will hit back

Either way, the portrayal is mainly useful in illustrating the depth of acrimony that has developed between them over the so-called “cancellations project” (see box). Tshidi appears not to take kindly to criticism, least of all from a subordinate who’s been at pains to exhibit her public-interest motivations. Until this attempted character assassination, under oath, Hunter’s reputation for integrity and competence as a top pensions lawyer has been unblemished. Were it otherwise, Finance Minister Pravin Gordhan would surely not have appointed Hunter to her FSB position in the first place.

More’s the pity that, on expiration of her contract, she’s soon to depart it. She’ll then join the dump of other talented officials squeezed from such state agencies as SA Revenue Services and the National Prosecuting Authority where their independence of mind was needed.

Nonetheless, her departure won’t derail the litigation she’s instituted against the FSB (TT April - June). Unless a settlement is reached in coming months, the trial will be heard from late November in the North Gauteng High Court. For now, the stage is set by answering affidavits that Gordhan, Tshidi and Jurgen Boyd (Hunter’s predecessor in the FSB post) have filed.

At time of writing, the answering affidavits of the FSB and Abel Sithole – chairman of the FSB board have to say could be crucial because, in her papers, Hunter contends that Gordhan relied on information provided to him by Sithole that was “false or otherwise misleading”.

   
Thsidi . . . good faith Hunter . . . minister misled

She avers that Gordhan’s reliance on a September 2015 letter from Sithole, to then finance minister Nhlanhla Nene, was “misplaced”. Thus, having not been “properly apprised”, Gordhan’s answering affidavit “contains incorrect and/or irrelevant statements of fact”. But Gordhan counters: “There is simply no factual support for the allegation that Minister Nene was misled.”

Flying hither and thither are serious allegations that will make for intriguing legal argument on the papers filed. They’re also serious for the light that might be shined on governance of the FSB and on the veracity of various statements, for instance in the latest FSB annual report. With the FSB about to be absorbed into the new authority for regulation of the financial sector’s market conduct, the trial should inevitably scrutinise the FSB’s own conduct. Credibility stakes are high.

Because the FSB reports to the minister of finance, Gordhan had to be cited by Hunter as a respondent. (The other respondents are the FSB, Sithole, Tshidi and Boyd.) Some excerpts from answering and replying affidavits, paraphrased for readability, offer a taste.

Gordhan: Soon after Hunter’s appointment in 2013, she obtained a legal opinion on the deregistration of apparently-defunct pension funds. It should be noted that the issue of dormant funds is complex. Various possible solutions and approaches exist e.g. creating a single national fund under the FSB,
or a single database for funds and members, or the current system of several unclaimed funds under various administrators. The complexity of the issue presented a longstanding difficulty in resolving it.

Hunter: These may be possible solutions to only some aspects of the problem i.e. the treatment of amounts held by dormant funds to provide for unclaimed benefits in specified amounts for specific persons entitled to such benefits and, if the registration of the dormant funds is cancelled, then the assumption of liability for the payment of those benefits by other entities. They do not provide a solution to the main problem i.e. the manner in which other assets and liabilities of such funds may lawfully be disposed of.

Gordhan: On the basis of the legal opinion, Hunter embarked on conduct which precipitated a highly acrimonious working relationship between herself and her subordinates, peers, Tshidi and the board. Disciplinary, grievance and complaint proceedings were instituted by her and against her.

Hunter: Such acrimony is attributable to their hostility towards my exposure of problems in the manner by which the cancellation project was conducted and their desire to conceal these problems. The board had every opportunity in the disciplinary proceedings against me to demonstrate that I was guilty of the charges. Instead, in light of admissions and concessions by the FSB counsel and by Sithole during his testimony, it was clear that I could not have been found guilty on any of them.

Gordhan: The board went to great lengths to resolve matters.

Hunter: It seems that the minister has been misled on this matter as well. In July 2014 I submitted my first non-compliance notice (NCN1) to the board. To date I have not been given a proper opportunity to elaborate on, and provide supporting evidence for, my allegations of misconduct against Tshidi. It is clear that the board never intended to procure such an investigation, notwithstanding the statement by Sithole during his evidence-in-chief at my disciplinary enquiry that the allegations in my NCN1 “were worthy of being investigated”.

FOLLOW THE MONEY

There’s a R16,5bn discrepancy in the amount of pension funds’ unclaimed benefits that has yet to be explored and explained.

On the one hand, the aggregate is estimated at R22,5bn. This is based on an extrapolation from the sample of pension funds, in the research finalised last October by accountancy firm KPMG, whose registrations had been cancelled by the Financial Services Board. The extrapolation depends on whether the sample was reasonably representative.

On the other hand, the aggregate value of assets held by unclaimed benefit funds – the FSB having said in a media statement that all assets in dormant funds had been transferred to unclaimed benefit funds -- is put at some R6bn. This is based on figures in the 2014 annual report of the Pension Funds Registrar as disclosed by the FSB to a trustee workshop in April.

The great bulk, if the R22,5bn extrapolation is anywhere near accurate, could well be accounted for in the policyholder funds backing assurance policies of life offices. These policies would have been issued to the cancelled funds where monies had not been claimed by those funds before their registrations were cancelled.

But reduce the R22,5bn to say a “missing” R1bn, give or take a few hundred million, and it isn’t paltry for perhaps thousands of fund members prejudiced by the cancellations that were arguably unlawful; especially since those members, many at low levels of literacy, are probably unaware of the monies owed to them.

The KPMG review was confined to a sample of “dormant” or “orphan” funds whose registrations had been cancelled. The KPMG report refers to the inadequacy of FSB records on disposals of the assets and liabilities of the funds prior to cancellation of their registrations.

That’s why conduct of he “cancellations project” is at the centre of the dispute between Rosemary Hunter and the FSB. The project had been almost concluded before Hunter became the FSB deputy executive officer for retirement funds in August 2013. Her three-year term of office expires in July.

The funds with cancelled registrations were called “dormant” or “orphan” because they had no properly-constituted boards of trustees. To these funds the FSB had appointed “Section 26 trustees” whose job under the Pension Funds Act is to constitute “valid” boards empowered to dispose of funds’ assets and liabilities.

However, they didn’t. Instead, where the funds had assets, the “s26 trustees” disposed of them before asking the Registrar to cancel the funds’ registrations.

These registrations were cancelled on the assumption that the affected funds had neither assets nor liabilities; in other words, that there had been legitimate disposals of them by the “s26 trustees”.

But the KPMG report presents a different picture. Hunter, who has applied to court for release of the full report, was allowed to see it for the purposes of this litigation only and has summarised its main features. Amongst them, according to one of her latest affidavits:

  • The sample reviewed by KPMG comprised 510 funds whose registrations had been cancelled. This represented 11% of the funds in a total of 4 651;
  • In relation to only 2% of the sample did the Registrar have in his records sufficient information “to satisfy a reasonable person in the position of the Registrar that the fund had no assets, liabilities or members such that it had ‘ceased to exist’ and its registration could be cancelled”;
  • For the rest, there were assets of some R2,5bn where the FSB had no reliable accounting records that could be found;
  • From information available, KPMG was unable to determine whether the funds’ “authorised representatives” or “s26 trustees” had taken reasonable steps to protect the interests of fund members, beneficiaries or other creditors. “On a balance of probabilities,” it said, “the opposite appears to be the case”;
  • When the Registrar cancelled the registrations, there was a “high likelihood” that the funds still had assets and/or liabilities”. This supports a conclusion “of a likelihood that material financial prejudice was sustained as a result of the manner in which the cancellations project was conducted”.

Hunter surmises: “It may be that there are assets with an aggregate value of R22,5bn (in some 4 000 funds not reviewed by KPMG) for the disposals of which, prior to the cancellations of those funds, the FSB did not have the information that a reasonable person in the position of the Registrar would require before deciding that they had ‘ceased to exist’ and cancelling their registrations.”

If that is so, obvious questions are begged: why the FSB records were inadequate; on what legal basis the FSB proceeded with the cancellations, and whether any “s26 trustees” or “authorised representatives” for the funds had interest conflicts.

Subsequent to the litigation being launched, the FSB appointed pensions-law expert Jonathan Mort as an inspector for further investigation of the cancellations project.

Gordhan: To address the cancellations issue itself, the FSB initiated investigations by retired Concourt Justice O’Regan and a firm of forensic auditors. Hunter nonetheless lodged a complaint with the Auditor General against the FSB and opened a criminal case with the Hawks.

Hunter: I referred my concerns regarding irregular expenditure to the Auditor General a year after I had brought those concerns to the attention of the FSB board. To comply with my duty under the Prevention & Combatting of Corruption Act, in June 2015 I reported to the Hawks my suspicions regarding fraudulent and/or corrupt activities involving FSB officials.

Gordhan: The FSB considered that Hunter’s allegations of “irregular expenditure” should stand over until the O’Regan and KPMG reports had been delivered. These reports were expected to cast light on any potential personal enrichment of FSB employees. Should any such enrichment be found, disciplinary steps would follow.

Hunter: In my notice of non-compliance, I had not alleged any personal enrichment by FSB employees in their conduct of the cancellations project. It would have been unreasonable for the board to have expected me to investigate and provide Justice O’Regan with evidence of any such enrichment when I am not a forensic investigator and do not have powers to compel disclosure of records that might provide evidence. Justice O’Regan was not given powers and resources for a forensic investigation. Further, it’s evident that Sithole had misrepresented to the minister the nature of the mandate by the board to KPMG.

Gordhan: The O’Regan report and the KPMG investigation squarely address the cancellations project and any prejudice it may have caused. Neither Justice O’Regan nor KPMG is contended to have been prevented, inhibited or undermined in performing their investigations.

Hunter: I alleged that Tshidi and other FSB staff members had engaged in acts of misconduct to prevent or impede an inquiry. In my NCN1, I asked the board to procure an investigation in accordance with applicable statutes and FSB policies. The fact that the board itself procured investigations into the conduct of the cancellations project does not sanitise the conduct of Tshidi and other staff members before then.

Gordhan: Had Justice O’Regan perceived any attempt to prevent, inhibit or undermine her or the KPMG investigations, she would not have asked Hunter to respect the process and await its outcome.

Hunter: That the board itself initiated an investigation into how the cancellations project was conducted is inconsistent with my allegation that Tshidi had incurred irregular expenditure in the course of his campaign to prevent and/or impede the conduct of an internal investigation I had initiated into the matter. The board’s actions in procuring the O’Regan and KPMG investigations did not remedy, 16 Today’s Trustee July/September 2016 and should not be allowed to obscure, the unlawful conduct of Tshidi and those who assisted him before then.

RETIREMENT REFORM

In his answering affidavit, Gordhan points to two key areas that required action by Hunter:

  • To update, finalise and issue as a directive the circular PF130 which deals with governance of pension funds;
  • To make the FSB trustee toolkit compulsory training, to give effect to the legal requirement that trustees attain training and skilling once appointed.

However, Gordhan points out, “these tasks have not been accomplished” by Hunter.

In her founding affidavit, Hunter details her numerous written communications – with Tshidi and National Treasury – to move the process along. Outlining her frustrations, amongst them exclusion from correspondence by Tshidi to Treasury, she wanted a meeting with Treasury where the agenda could include her policy concerns about the Private Sector Security provident fund.

Gordhan says: “Convening a meeting while higher priorities have not been accomplished was not what the circumstances required. Hunter’s fixation on dormant funds was at the expense of more systemic retirement-fund reforms.”

Hunter responds that her principal function is to protect particularly the most vulnerable members of pension funds: “It is a matter of considerable concern to me (that) my conduct in seeking to address a multi-billion rand financial scandal (is described) as a fixation on dormant funds”.

Even had she not been subjected to “occupational detriments”, she says, with all her routine responsibilities she could not have been expected “to disregard my legal and ethical duties and instead to produce regulatory instruments that I could only have produced if I had the assistance of properly skilled researchers and legal drafters”. She’d been denied the budget to engage them.

Gordhan: A regulation under the Public Finance Management Act has been invoked in support of the contention that, unless Hunter’s non-compliance notices were investigated, her ability to perform her functions before her term expires at end-July would be compromised. It is improbable that a final judgment will be handed down either before the expiry of her employment term or the term of board members. Even were an investigation to be initiated now, it’s unlikely that it could lead to the removal of board members or the executive officer.

Hunter: Whether board members or the executive officer should be removed is surely a matter to be decided after a report of the investigation.

Now on to the direct confrontation between Tshidi and Hunter.

Tshidi: The founding affidavit, with annexures, comprises a massive 926 pages. The bulk of this is devoted to traversing “issues” completely irrelevant to the relief claimed. She is attempting to ventilate the very issues she wishes to have investigated by the intended investigating party. The court is not called upon to adjudicate any such irrelevant issues and it is not within the court’s remit to do so.

Hunter: I have sought to demonstrate the basis upon which I had wanted the conduct of Tshidi and Boyd, and other persons, made subject to investigation by investigators appointed by the board and/or the minister. I have not asked the court to make findings in regard to that conduct in the absence of the results of such investigation.

Tshidi: The citation of myself and Boyd, and the inclusion of the mass of irrelevant and vexatious matter, are aimed at extracting responses which Hunter intends using in other proceedings. A detailed response to such vexatious allegations is neither necessary nor indicated, and I will accordingly refrain from doing so.

Hunter: Tshidi has decided not to admit or deny, other than in general terms, the specific allegations that I made against him in my founding affidavit, despite having entered an appearance to defend. The implications of these choices will be addressed in argument before the court.

Tshidi: A great deal of attention is devoted in the founding affidavit to the cancellations project. The full background and description of the historical problem, and the manner in which the project was undertaken, were set out in the comprehensive submission of Boyd to Justice O’Regan. I fully refute Hunter’s contention that this project had been embarked upon recklessly or mindlessly. I similarly reject any accusation, allegation or suggestion that (the conduct of) Boyd or myself, or any FSB officials involved in the project, had not been bona fide.

Hunter: If my averments are inconsistent with the contents of my founding affidavit and my written submissions to Justice O’Regan, Tshidi must prove it.

Tshidi: Justice O’Regan had expressly found that there was no dishonesty on the part of the Registrar in performing the cancellations.

Hunter: Justice O’Regan made no such finding. Having noted that no evidence of improper conduct
(in the narrow sense) had been placed before her, she recommended an audit process to investigate the factual question of whether there’d been improper, dishonest or corrupt conduct.

Tshidi: Hunter’s grievance notice NCN1 was largely directed at me. My overall impression gained from the document was that Hunter was an angry person who had lost perspective and was seeking an outlet for her emotions on the premise that everything she believed and complained of was indisputably correct. The bulk of NCN1 consists of personal attacks on me and others whom Hunter believes had committed an injustice to her, to which she now wished to retaliate. I decided that the dignity of my office did not allow me to descend to the level of NCN1 and that I should instead identify (to the FSB board) the issues that lay at the root of Hunter’s outburst.

Hunter: The truth is that Tshidi does not wish to be held accountable for his conduct. His attitude towards his own powers and responsibilities demonstrates that he is not fit for senior public office. Judgment is probably not to be expected before January at the earliest.